Union Budget 2009-10 : An opportunity to Accelerate Growth
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@gmail.com
The upcoming Union Budget is the time for the Manmohan Singh government to prove its competence. The government has a strong political mandate, the voter has guaranteed stability to the government for next five years. As the govt prepares to take its first exam next week, it would be interesting to see how Team Manmohan fares in the absence of any counterbalances which existed within the previous government in the form of its own Left partner.
We have paid a very heavy price for Nehruvian folly of letting government manage the business, and after wasting many years, and spending a mammoth amount of capital, we now know that, the business of the government is to govern, and not to do business, the interest of the economy is best served, when the business is left to the private sector. This budget should give a golden opportunity to the government to disinvest, to gradually withdraw from the businesses it has been doing.
There is a need to bring in more foreign money. India already has an advantage in that the credibility of the present government is very high with an envious track record. As more countries vie for this fund, it would be important for India to ensure that it continues to remain a profitable destination for the investors. This will give us the much needed capital. A more liberal FDI regime would help in this direction. The FM needs to identify more areas where foreign participation can come in, and shall also have to think in terms of increasing the permissible limits in the existing areas.
The government is likely to hit the jackpot with 3G/WiMax auction which is likely to fetch about $10 billions, about 0.8% of the GDP! It is time we think of smart moves such as this for raising revenue rather than taxing the already heavily taxed taxpayer. It would be important for the FM to spare the individual taxpayers: the amount of additional revenue you may derive from them is more than offset by the amount of dissatisfaction it generates. A higher tax slab or a higher 80C deduction is likely to bring cheers on all urban faces.
There is an urgent need to think in terms of fiscal consolidation. The actual fiscal deficit for the year 2009 has been around 6%. The fiscal deficit for the year 2010 is likely to be around same figure. However, there are many intriguing 'below the line' items, like off-budget subsidies for oil and fertilizers, that need to be brought 'above the line', so that a clear picture could be presented to the people. These off-balance-sheet items have an impact of as much as 1 to 1.5% on the GDP. A government committed to transparency and fair play, should come forward and make the modification in the way things are presented, even if it means presenting grim, ( but realistic) picture. The Finance Minister will get acclaims for being more conservative and prudent.
Agricultural has been growing at a pathetic rate of growth of 2.7%. The share of agriculture in the total GDP is as low as 18.5%. Committing substantial resources an agriculture may prove to be a drain on the national resources, unless urgent steps are taken to increase the productivity of agriculture. Agriculture has to grow. It is a sine qua non. There is no alternative. 70% of the population depends directly or indirectly upon this sector, which contributes only 18.5% to the GDP. If this sector does not attain a justifiable rate of growth, committing more resources to this sector would drag the rate of growth of GDP down. Agriculture shall have to be treated as a viable business proposition, with about 4 to 5% growth rate, and then alone it shall be able to sustain itself. It is hoped the FM decides to spend more money on creating the virtually non-existent rural infrastructure instead of wasting resources on populist programmes which do not add any value to the economy.
There are two major policy corrections required in respect of the rural economy:
First, in order to enhance productivity, infrastructure and technology bottlenecks in agriculture have to be lifted.
Secondly, in order to provide gainful employment to a very large number of unemployed people, non-agricultural jobs must be found.
The government had announced a fiscal package to handle the international financial crisis. There has been a noticeable recovery in the economy subsequently and the domestic demand and consumption is on the rise. Since the economy is on the road to recovery, it would be dangerous to fiddle with the concessions already given, at the moment and the FM would do well to continue the concessions given in Excise duty and Service Tax for some more time.
This being the first budget of the new government, and the new FM, the populist flavour is likely to pour in abundance. Increased allocation for programmes on food, health and housing is not ruled out. The revenue for increase in such expenditure is likely to come from disinvestment , higher FII and FDI inflow and 3G/WiMax auction.
Stock market continues to be a major source of fund mobilisation for the economy, and the market gave a thumbs up to the new government in the form of a 2000 point spike in Sensex, which is unprecedented in the history of the world. Market has great expectations from the budget, and a cut in STT rate may keep the euphoria alive.
Manmohan Singh's government is better placed than any other government in the past. It has a strong mandate, it is progressive, has tasted the fruit of success in the past term, and does not carry any unwanted baggage from past on its shoulders. This budget would be like first Semester exam for the government, which will provide a window into its subsequent working.
